Mark Mobius, chief of investment house Franklin Templeton, and a known emerging market bull thinks the S&P downgrade of U.S.’s sovereign ratings makes emerging markets more attractive.

Excerpts from his note:

…Standard & Poor’s potential downgrade of U.S. debt had been signaled for a few weeks, so it did not come as a complete surprise. In fact, some smaller rating agencies had already downgraded the U.S. Nonetheless, the initial market reaction will likely be a high degree of uncertainty and volatility, since investors will likely not know where to turn for assets with lower short-term volatility.

During the subprime crisis, investors largely sought such assets in U.S. Dollars and Treasuries. While during the subprime crisis the USD index was high, now it is low reflecting a changed perception of markets that may be considered less volatile in the short-term.

In particular, we believe currencies and stocks of emerging countries may look relatively attractive given:

(1) emerging markets generally have more foreign reserves than developed countries and
(2) the debt-to-GDP levels of emerging countries tend to be lower than developed countries. This improved ability to manage their currencies and historically better ability to service debt is why we believe emerging market currencies have been so strong – and may continue to be.